Finance Case Study

Ratcliffes - A Case Study

By Jonathan Pelley

Level 5 Professional Diploma in Management Studies

Report for Mick Landers

Executive Summary

This report has been produced to give an accurate indication of the current financial position of Ratcliffes Ltd.

At first glance it would seem that Ratcliffes is a successful profitable business with Gross Profit and Operating Profit both increasing year after year. However, if we look closer at Ratcliffes accounts we will see a company with some problems. With a low return on investment, poor stock turnover and excessive numbers of staff this is a business which needs to get control.

With more planned capital investment needed for expansion of the restaurant, Racliffe's need to look at more urgent improvements to the business, such as complying with Health and Safety features, repairs and maintenance and sorting out their complicated management and staffing structure.

This report will explore all aspects of the business mentioned here and make any necessary recommendations for improvement.

Introduction

Ratcliffes Ltd was founded by Jack and Ruth Ratcliffe in 1968. As time went by the restaurant began to build up a reputation for quality and good service. In the late 1980's Ratcliffes began to expand. It was in the late 1990's that a new management team was created to look after the day to day operations of the business.

The new management team have decided to make an initial assessment of the business. They have asked our team of consultants to look at the financial opportunities and constraints, the people within the business and whether they are being deployed effectively.

We have focused on three main areas:

- to asses the current performance of the business using relevant ratio analysis and to asses the business against its competitors

- to asses the viability of expansion of the restaurant upstairs using a cash flow forecast

- to asses the viability of a takeaway service using break-even analysis

The findings are discussed in this report followed by a series of recommendations on how the business should move forward.

Findings

Before we can make any recommendations to Ratcliffes we need to analyze the current performance of the business

At first glance it is easy to see that Ratcliffes has many strengths and weaknesses as a business.

One of the biggest strengths of the business is the reputation that has developed over the years of trading. The business is now well established, with a good reputation, which will be favourable to customers and suppliers. Another crucial factor of the business is the fact that the Ratcliffes now own the South Bristol branch. Ratcliffes have also recently been granted a liquor licence. A quick look at the Balance sheet and the Profit and Loss accounts also tell us that Ratcliffes is a profitable company and has had steady growth for the last few years. The company is also strong on fixed assets and turnover has been steadily rising.

However the business does have weaknesses. The organizational structure seems over-complicated and the Ratcliffes had to take out loans to get the business started. There is also some work to be done in order to meet health and safety requirements. The South Bristol branch has some rising damp and wet plaster issues and the North Bristol sites wiring is in desperate need of inspection.

We will look at some of these factors in more detail later in the report

It is also evident that there are no clear records of performance or accounts at either restaurant. This is an issue that will need to be addressed but for the purpose of this report we will look at both sites as one business

The findings here have resulted in analyzing the following areas:

- the current performance of the business

- how the business performs in relation to its competitors

- other areas - repairs, maintenance, management and staffing structure

- cash flow analysis concerning expansion of the business

- break-even analysis concerning takeaway service

Current Performance of Business

Our analysis of the business was carried out by applying a number a ratio's to the business accounts. These ratios's show how different areas of the business are performing. We can also see if there are any trends of the business over a certain time period. The ratio's do have some limitations which we will look at when we examine the ratio's individually

Gross Profit Margin vs Operating Profit Margin

The Gross Profit Margin (GPM) shows us the profit a business makes on its cost of sales and it tells us how much gross profit per Ј1 of turnover our business is earning. Generally the gross margin is an indicator of trading performance.

The Operating Profit Margin (OPM) tells us the amount of net profit per Ј1 of turnover a business has earned. That is, after taking account of the cost of sales, the administration costs, the selling and distributions costs and all other costs, the operating profit is the profit that is left. Trends in the net margins might provide pointers to the effectiveness of controls over the levels of overheads.

The Gross Profit Margin should be a lot higher than the Operating Profit Margin as it is the profit before we take off any administration costs.

When we compare the gross and the operating profit margins we can gain